I wrote yesterday that while I was still bullish on U.S. equities I could see a strong case for investors shifting their attention from seeking value to looking for growth oriented investments. Sometimes, though, it is possible to have your cake and eat it too.
That doesn’t mean that there isn’t any value around, though.
There are still a few stocks where the company is in a sector that has lagged in the recovery and that still offer significant upside potential. Take UTI Worldwide (UTIW), a global freight forwarding and logistics company, for example.
The problem, of course, is that if a stock is cheap there is usually a sound reason. In the case of UTI that reason is the most basic one of all; they have missed earnings expectations in three of the last four quarters, and over the last couple of years have slipped from an operating profit to a loss.
In today’s “What have you done for me lately?” world even when a company runs at a loss as a result of significant investment in their future, the stock is usually punished and UTIW is no exception.
You should keep in mind, though, that not all losses are created equal. Management at UTI has spent the last couple of years reducing debt and improving productivity, while also building out a whole new IT infrastructure. The problem is that this restructuring has come at a time when UTI’s core business and revenues are down.
There are good reasons however, to believe that revenues may start to pick up, just as the new, leaner, meaner UTI is ready to take full advantage. Traders and global investors must believe that worldwide trade is about to pick up again or stocks could not possibly be as high as they are, even given huge liquidity injections from the world’s major central banks.
Belief in that takes some degree of trust in the stock market and its role as a forward discounting mechanism. The strong surge up in stocks over the last few years, both in the U.S. and elsewhere, has come in spite of a general slowing of global shipments; the very thing that UTI relies on for business. That the surge has still taken place, though, would suggest that the big money is betting on a recovery in global trade. It is possible that the smartest economists and financial minds on the planet are all wrong and global shipments will continue to decline, but given a choice, I would rather bet on them than against them.
UTI will be releasing earnings tomorrow and given the paucity of opportunities for big profits in what looks like a fairly valued market, it is tempting to take a chance on them in advance of that announcement and subsequent call. If you are truly addicted to risk then have at it, but the more cautious side of me says that waiting until after earnings may be a good thing. Sentiment is so low that even a moderately good quarter could be met with further selling, and if they knock it out of the park and the stock does jump there will still be plenty of subsequent upside if a true turnaround is in place. Even if there is little evidence of an imminent turnaround, though, the stock at 1.35 times book value is cheap enough to look like a possible takeover target, and in the current environment even a remote possibility of that will lend support.
UTI has suffered as the after effects of the recession have lingered, but they have approached that situation with an eye to the future, cutting long term operating costs and improving efficiency. Absorbing the short term costs associated with those moves at a time of broader industry weakness has resulted in the stock suffering, but now it is at a point where it could represent tremendous value and have growth potential. Whatever happens on tomorrow’s earnings release that combination make it look like a buy to me.